The Unintended Consequences of the Speculation Tax on the Vancouver Housing Market with Mark Milke

March 22, 2018

Will the NDP speculation tax actually help locals who live and work in British Columbia? Policy critic Mark Milke doesn’t think so and sits down with Adam and Matt to detail how government intervention has frequently had a negative impact on the Vancouver housing market. Throw the speculation tax on the heap!

Episode Summary

About Mark:

Mark was born and raised in Kelowna, where he loved living. Over the years, he’s been back and forth between BC and Alberta, most recently in Victoria from 1999-2002 to work for the Canadian Taxpayers Federation. Mark also worked for the Fraser Institute from 2010-2015. He has worked on advocacy for more careful spending by government, tax issues with the Taxpayers Federation, and policy work for the Fraser Institute and others, including Canadian, American, and European thinktanks. Currently, he is a full-time author and columnist with the Globe and Mail, Macleans, the Calgary Herald, and occasionally the Vancouver Sun.

To lower prices, you either need to decrease demand or increase supply, or both. Look at where BC has been over the past 40 years: in the 1970s, the BC NDP brought in supply-limiting measures during their first term, with the BC Agricultural Land Reserve. Many people love it, and the views nearby are nice. However, one problem with it is that it limits supply of land for development. Other measures are in place by municipalities to limit supply, for instance West Vancouver restricts development of skyscrapers. Rent control has been in place in BC for a long time under different governments. Economists do not like rent control because it tells investors they should put their money elsewhere as you may not make decent returns or even break even each year. Some famous left-wing Swedes, including Nobel Prize winner Gunnar Myrdal, are critical of rent control. A famous quote by another critic goes, “In many cases, rent control appears to be the most efficient technique known to destroy a city, except for bombing it.”

Putting all these factors together, combined with the natural factors of the ocean and mountains, heavily restricts supply in BC and makes living in BC expensive. When you add to that the speculation tax, you can see investment is not being encouraged in the province. The 2% speculation tax amounts to $6,000 on a modest $300,000 property that isn’t long-term leased out. It isn’t clear if the Province understood the tax’s unintended consequences when they implemented it, or what they are going to do to fix the mess.

On why rent control is bad for renters in a down market:

Look at Alberta, which does not have rent control. The economy boomed for 15 years when oil was at higher prices. Many apartment buildings built for rentals are fully occupied and rented out by companies, along with private owners. Everyone was reacting to the market and making a buck. If rent control was in place, there would not have been as many buildings built because the return wouldn’t have been the same. If you can’t raise rents to match the market, you reduce incentive for people to build and you constrict supply even further. Maybe when a tenant moves out you can raise the rent, but this is limiting. So, if you have less supply during the boom times, when the market crashes your limited supply will still be tight—this means no competition from other landlords for tenants and your rents will still stay high. BC rents are high because every time a tenant moves out, a landlord can jack up the rent—this is a real problem if you are new to BC or not in the rental market. Rent control is great for tenants in the short term, but as soon as they move they are facing above-market rates. More supply in our market, like Edmonton and Calgary have, would naturally constrict this. It’s a renters’ market in Alberta and landlords must cut deals.

On what types of policies make a better approach to Vancouver’s affordability crisis:

This is a decades-long problem. Demolish rent control; open up supply. If British Columbians want green space, they have to pay for it. Let land be developed to get lower rents. There are too many restrictions to allow for this. The speculation tax is another problem because it tells investors they need to fill so many unclear conditions, or pay quadruple the tax. It’s unclear if the tax will apply to owners renting out properties less than 12 months a year. For out-of-province investors, it’s also unclear if they get the income tax refund later, after paying the speculation tax. The government charged ahead and ignored the real problem, which is perhaps at the federal level. We know there’s illicit money in BC, so deal with it without punishing local and other Canadian investors.

On why the speculation tax is so unclear and if there’s another strategy:

There was no strategy, which is the point. Someone in the government decided on this tax, maybe with good intentions, but without thinking it through and speaking to experts and economists. The illicit money flows in the province are adding to the demand—deal with this, which requires a more targeted, thoughtful approach. The government rushed and should have worked with the Federal Government. During elections, politicians often make promises they have no idea how they’ll fulfill; this is an example of that. If you’re rich you can afford the speculation tax, but they’re targeting average-income Canadians who want to rent out a second home. They can’t afford it, so the unintended consequence of the tax is it reserves the market for the very rich—as if it wasn’t tough enough already to buy in BC.

On what the repercussions for the market will be, and which segments will be affected most:

Unless the government clarifies who will be impacted, it seems that lower and mid-priced condominiums will suffer most, at least in the short term, and maybe the longer term.

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